Hungary for Assistance

Position: Long British Pound via FXB

 

Hungary is flashing a clear negative divergence across numerous metrics today on the heels of a bearish IMF statement over the weekend. Here is the set-up behind the numbers:

 

The IMF concluded in its review of Hungary’s $25 Billion emergency bailout that “a range of issues remain open” and that the country is not doing enough to slash spending or make long-term reforms to its economy. If you’ve followed Hungary this report comes as nothing new: the government has struggled over the last five years to manage its budget imbalances, forcing the IMF to take the lion’s share of a $25 Billion loan in Oct. 2008 (with the EU and World Bank contributing ~ $8.1 Billion and $1.3 Billion, respectively) to support Hungary’s outstanding debt.

 

While skeptics may conclude that Hungary has no intent to issue “real” fiscal reform, but rather will pander to whatever the IMF wants to see, we’ll wait until this Thursday, when the government meets to vote on its next economic plan, before concluding further. However, it’s worth noting that going into the vote Hungary’s ruling Fidesz party has municipal elections on October 3rd and loud protests against austerity measures in mind.

 

Market Sentiment

 

The Hungarian market reacted decidedly negatively to the IMF’s statements, with investors worried that the country could jeopardize its access to a €5.7 Billion IMF loan tranche earmarked for this year. 

 

Here’s what the market said:

  • Hungary’s equity market (BUX) fell -2.3% today (1st chart below). [You’ll note that our read-through on the European bank stress tests (which will be released this Friday) is that these banks (91 in total) are largely set up to NOT fail, yet should negative issues arise we’d expect the EU to write checks quickly to fund the gap.]
  • The Hungarian Forint versus the EUR took a dive into the news (2nd chart below).
  • The country’s sovereign CDS rose materially (3rd chart below).

Take-Away

 

One concern with a weakening Forint versus the EUR or Swiss Franc is that many loans extended in Hungary over the last five years were denominated in lower yielding Euros and Francs. Clearly a depreciating Forint increases risk of default as debtors are squeezed further with repayments. 

 

The IMF also took issue with the country’s two-year levy on banks, aimed at raising over $900 Million, citing that “a significant negative impact on the country’s investment climate and economic growth.”  Also, we note the worry for foreign banks in Hungary, in particular the Austrian lenders Raiffeisen and Erste, as relative loser under these parameters.

 

Hungary gets another chance to prove its fiscal discipline when the IMF meets again in September. Between now and then we could see an uptick in volatility in Hungary and related Western and Eastern European markets. Despite the Euro’s recent gain above $1.29, clearly Europe’s sovereign debt default fears are not in the rear-view window!

 

Matthew Hedrick

Analyst

 

Hungary for Assistance - hung1

 

Hungary for Assistance - hung2

 

Hungary for Assistance - hung3


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more